1
UNIT-III
Cost Analysis,
Market Structures and Pricing
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS
What is Pricing? 2
Pricingis the function of determining product value in
monetary terms by the marketing management of a
company before it is offered to the target consumer for
sale.
“Cost-based” is product driven; a summation of costs
(Soaps, Daily Bread)
“Value-based” is customer perception driven (Mobile
Phones, Apparel)
Meaning of Pricing 3
Pricing is one of the most important elements of the marketing mix
Price is the marketing variable that can be changed most quickly.
The price of a product may be seen as a financial expression of the value
of that product.
“Price is amount of money charged for a product or service. It is the sum of
all the values that consumers give up in order to gain the benefits of having
or using a product or service”.
Marketing Mix
Total Revenue = Price * Quantity Product
Profits = Total Revenue - Total Cost Price
Place
Promotion
What must I consider before setting a price? 4
1. Know how much it costs to make and deliver product
or service Direct and Indirect costs. Fixed and Variable costs.
2. Know your breakeven point
3. Research current prices in the market.
[Link] your market positioning and
competitive advantage as this is likely to impact directly on
your choice of pricing strategy.
Importance of Price 5
Choosing the right pricing strategy strengthens the chance of
achieving turnover and profit in line with company
objectives.
Getting it wrong can be painful!
Importance of Price 6
Often price creates a first impression of the quality of the product/service and
other value-based judgements come later.
Pricing low can signify cheap and cheerful, pricing high can indicate quality
Pricing Objectives 7
To maximise profits
To increase sales
To increase the market share
To satisfy customers
To meet the competition
Factors Affecting Pricing 8
Pricing Approaches 9
Pricing approaches 10
Cost-Based Pricing
Cost-Based pricing involves setting prices based on the
costs of producing, distributing, and selling the product
plus a fair rate of return for its effort and risk.
A company’s costs may be an important element in its
pricing strategy.
Pricing approaches 11
Value-Based Pricing
Rather than cutting prices to match competitors, they attach value-added features and
services to differentiate their offers and thus support their higher prices.
It is a pricing strategy which sets prices primarily, but not exclusively, according to
the perceived or estimated value of a product or service to the customer rather than
according to the cost of the product or historical prices.
when products are sold based on emotions (fashion),
In shortages Ex- drinks at open air festival and hot summer day or
for complementary products Ex- printer cartridges, headsets for cell phones
Value-Based Pricing 12
Value-based pricing in its literal sense implies basing pricing on the product benefits perceived by
the customer instead of on the exact cost of developing the product.
Ex- a painting may be priced as much more than the price of canvas and paints:
The price in fact depends a lot on who the painter is.
Painting prices also reflect factors such as age, cultural significance and most importantly, how
much benefit the buyer is deriving
Owning an original Dali or Picasso painting elevates the self-esteem of the buyer and hence
elevates the perceived benefits of ownership
Price: Role and Function 13
Signal to the Buyer
Instrument of Competition
Improving Financial Performance
Marketing Program Considerations
Price: Role and Function 14
Signal To The Buyer
• Direct way of Communication
• Basis of Comparison between brands
• Positioning the brand
Low Price product- positioned as High Price Positioned as a Luxury Car
affordable
Price: Role and Function 15
Instrument of Competition
• Quickly attack Competitors
• Position your business away from Direct Competition
Price: Role and Function 16
Instrument of Competition
Price: Role and Function 17
Improving Financial Performance
• Impact on Business Financial Statements
Ex: Maggi
Maggie had to face litigation . It resulted company,
net loss in 2 quarters. Company launched the
product with an increase of INR 2
Price: Role and Function 18
Marketing Program Considerations
Substitution for advertising and sales promotion
Incentive to channel members
Retailer Customer
Wholesaler (INR 20)
Company (INR 18)
( INR 15)
Pricing: Price Setting; 6 Step Process 19
1 Selecting the price objective
2 Determining demand
3 Estimating costs
4 Analysing Competitors' Costs, Prices, and Offers
5 Selecting a pricing method
6 Selecting the Final Price
Pricing Methods and Strategies 21
1 Cost based Pricing Methods
2 Demand based Pricing Methods
3 Competition based Pricing Methods
4 Strategy based Pricing Methods
5 Pricing based on other Economic Considerations
22
1 Cost based Pricing Methods
Using the cost of production as the basis for pricing a product.
Here the selling price of a product will be the cost to produce it.
It includes :- Direct and indirect costs ,Additional amount to
generate profit
It is an approach which uses the total cost of producing the product
or service and adding some amount to allow the business needs to
make a profit.
1 Cost Based Pricing Methods 23
Cost plus /Mark-up Pricing
Full Cost/ Absorption Cost Pricing
Marginal Cost/Incremental Cost/ Direct Cost
Pricing
Target Profit / Rate of Return Pricing
Programme pricing
1 Cost Based Pricing Methods 24
(i) Cost plus/ Mark-up Pricing
Cost-plus pricing is also known as mark-up pricing where
cost + mark-up = selling price.
Product unit’s total cost + percentage of profit(manufacturers, wholesaler's and
Retailer's).
In this average cost at normal capacity of output is ascertained and then a
conventional margin of profit is added to the cost to arrive at the price.
Mark Ups are high on seasonal items, speciality items, demand
inelastic items etc.
1 Cost Based Pricing Methods 25
(i) Cost plus/ Mark-up Pricing
This method is suitable where the costs keep fluctuating from time to time.
Commonly followed in departmental stores and other retail shops.
Does not consider the competition factor.
1 Cost Based Pricing Methods 26
(ii) Full cost pricing/Absorption cost pricing
• Mainly used by manufacturing firms.
• It uses standard costing techniques.
• Total cost will be computed by adding
Fixed cost
Variable cost
Selling and administering cost
Advertisement cost Profit
1 Cost Based Pricing Methods 27
(iii) Target Profit Pricing
It is also known as Rate of return pricing.
Setting price to ‘target’ a specified profit level
It is similar to full cost pricing but is different from it in
some respects.
In this method also the total cost is computed in the same
manner and a required margin of profit is added.
This required margin of profit is arrived at on a rational
approach by keeping in mind the return-on-investment
criteria rather than done arbitrarily as in full cost pricing
method.
1 Cost Based Pricing Methods 28
(iv) Marginal Cost Pricing
In Marginal Cost pricing selling price is fixed in such a
way that it covers fully the variable or marginal cost and
contributes towards recovery of fixed costs fully or partly,
depending upon the market situations.
In times of stiff competition marginal cost offers a
guideline as to how far the selling price can be lowered.
This is also called Break-even pricing.
1 Cost Based Pricing Methods 29
(v) Programme Pricing
In this pricing, the price is related to the supply price. In
order to cover own cost and profit margin, a mark-up is
put over the supply price.
The supply price may be the whole sale price or that the
goods at the go down etc.
This pricing policy is quite popular in wholesale and
retail trade
2 Demand based Pricing Methods 30
Demand based pricing is a system where the price is based on the
customer ‘demand’ or need for the product. If the product is unique
or innovative, a value-based price may help create a demand for the
product or service.
The following method belong to the category of demand-based
pricing:
i. Price discrimination or Differential pricing
ii. Perceived value pricing
2 Demand based Pricing Methods 31
(i)Price discrimination
Practice of charging different prices to customers for the same
good. It is also called differential pricing.
Price differentiation depends on geographical location of the
consumers, type of consumer, purchasing quantity, season, time
of the service etc.
Ex. Govt. Hospitals-Patients are charged based on their income
levels
Telephone charges, Movie tickets, Bus tickets, Train tickets
2 Demand based Pricing Methods 32
(ii)Perceived value pricing
price fixed on the basis of the perception of the buyer of the value of
the product.
For example: Mobile phones without touch screens these days.
John Deere Tractor
Perceived value
Durability
Reliability
Service
Longer warranty
2 Demand based Pricing Methods 33
This method of pricing is desirable under the
following conditions :
[Link] sales volume of the product is very sensitive to
price.
[Link] a large volume of sales is to be affected.
[Link] stability of price is required.
3 Competition based Pricing Methods 34
This pricing method is useful when the product is homogeneous, and
market is highly competitive.
Under this method, the company tries to maintain the price of its
products more or less at par with its competitor's price. This pricing
method includes :
Going rate pricing
Sealed bid pricing
Loss Leaders
Trade Association Pricing
3 Competition based Pricing Methods 35
§ Customary Pricing
§ Price Leadership
§ Cyclical Pricing
§ Imitative Pricing and Suggested Pricing
§ Turnover Pricing
§ Premium pricing
§ Discount pricing
3 Competition based Pricing Methods 36
Going rate Pricing
Price is charged in tune with the price in the industry as a
whole. When one wants to buy or sell gold, the
prevailing market rate at a given point of time is taken as
the basis to determine the price
Market leaders keep announcing the prevailing prices at a
given point of time based on demand and supply
conditions
Ex. Automobiles, Electronics etc.,
3 Competition based Pricing Methods 37
Sealed bid Pricing
Thismethod is more popular in tenders
& contracts.
Each contracting firm quotes its price in
a sealed cover called ‘tender’. All the
tenders are opened on a scheduled date
and the person who quotes the lowest
price is awarded the contract.
3 Competition based Pricing Methods 38
Loss Leaders/Loss Leader pricing
Goods/services deliberately sold below cost to encourage
sales elsewhere.
" A Loss Leader is an item which produce a less than customary
contribution or a negative contribution to overhead, but which
is expected to create profits on increased future sales or sales of
other items"
Typical in supermarkets,
Purchases of other items more than covers ‘loss’ on item sold
Ex. ‘Free’ mobile phone when taking on contract package
3 Competition based Pricing Methods 39
Trade Association Pricing
To avoid uncertainties of pricing decision and the
downward pressure on prices which competition exerts,
firms frequently come to the express or implied
agreements to maintain prices at a similar level.
3 Competition based Pricing Methods 40
Customary Pricing
Incase of some commodities prices get fixed because they
have prevailed over a long period of time.
Any change in costs reflects quality and Quantity.
Ex. Cup of a Tea or Coffee
3 Competition based Pricing Methods 41
Price Leadership
Price leadership is said to exist when firms fix their prices in a
manner dependent upon the price charged by one of the firms in the
industry.
The firm which takes the initiative in announcing its price changes
is called the price leader.
Ex. Cadbury-Chocolate Industry
HLL - Soap Industry
3 Competition based Pricing Methods 42
Cyclical Pricing
When pricing by a firm is based on assessment of general economic
environment, it is known as cyclical pricing.
Ex. In case of depression- reduce the price
In case of boom - discounts and allowances
3 Competition based Pricing Methods 43
Imitative Pricing and Suggested Prices
Imitative Pricing
This approach is often used in retail business.
In Oligopolistic Market conditions, the firms often follow a price
leader.
In non-oligopoly situations also, it is many a time considered
useful to imitate the price set by other firms.
This approach makes decision-making quite easy, as the decision-
maker does not have to undertake the demand and cost analysis.
3 Competition based Pricing Methods 44
Imitative Pricing and Suggested Prices
Suggested Price
The manufacturer or wholesaler has found feasible, given
the market conditions.
Itsuggests the retailer to charge this price from the
customer.
3 Competition based Pricing Methods 45
Premium Pricing
Premium pricing is a strategy that involves tactically
pricing your company’s product higher than your
immediate competition.
The purpose of pricing your product at a premium is to
cultivate a sense in the market of your product being just
that bit higher in quality than the rest.
Ex-Jaguar, BMW, Ferrari, Lamborghini, Armani
exchange, Rolex watches, Gucci, Lavie, kompanero etc.,
3 Competition based Pricing Methods 46
Discount Pricing
Discount pricing is a pricing strategy that involves deducting
a certain percentage off the original market price of a
product or service.
People are drawn to discounted products because consumers
love feeling as if they are scoring a good deal, and discounts
also create a sense of urgency that might drive more
customers to convert.
Seasonal discount, clearance discount, Volume discount etc.,
4 Strategy based Pricing Methods 47
Market skimming
Market penetration
Two-part pricing
Block pricing
Commodity bundling
Peak load pricing
Cross subsidization
Transfer pricing
4 Strategy Based Pricing Methods 48
Market Skimming
When the product is introduced for the first time in the market, the company follows
this method. Under this method, the company fixes a very high price for the product.
The idea is to charge the customer maximum possible. Mostly found in technical and
luxury products.
As the word skimming indicates, this method literally skims the market in the
first instance through high price and subsequently settles down for a lower price.
This method can be followed only when
The demand for the product is inelastic
There is no threat from competitors
A high price is coupled with high technology or quality
4 Strategy Based Pricing Methods 49
Market Penetration
It is opposite to the market
skimming method. Here the product price is
fixed so low that the company can increase
its market share.
It is intended to help the product penetrate
into markets to hold a position.
This can be done only by adopting a low price
in the initial period or till such time the
product is finally accepted by customers.
4 Strategy Based Pricing Methods 50
Two-part pricing
A firm charges a fixed fee for the right to purchase its
goods, plus a per unit charge for each unit purchased.
Ex-organizations such as country clubs,
golf courses charge membership fee and offer their
products & services cost to- cost.
4 Strategy Based Pricing Methods 51
Block Pricing
Block pricing is another way a firm with market power
can enhance its profits. We see block pricing in our day-
today life.
By selling certain number of units of a product as one
package, the firm earns more than by selling unit wise.
Six lux soaps in a single pack or Maggi noodles in
a single pack illustrate this pricing methods.
4 Strategy Based Pricing Methods 52
Commodity bundling
Commodity bundling refers to the practice of bundling two
or more different products together and selling them at a
single ‘bundle price’.
Ex. The package deals offered by the tourist companies,
airlines etc.
4 Strategy Based Pricing Methods 53
Peak load Pricing
During seasonal period when demand is likely to be higher, a firm
may enhance profits by peak load pricing.
The firm’s philosophy is to charge a higher price during
peak(festivals and holidays)times than is charged during off
peak times.
Ex. Airline companies
4 Strategy Based Pricing Methods 54
Cross subsidization
In cases where demand for two products produced by
a firm is interrelated through demand or costs,
the firm may enhance the profitability of its
operation through cross subsidization.
Using the profits generated by established products, a
firm may expand its activities by financing new
product development and diversification into new
product market.
Ex. A computer company selling both hardware &
Software..
4 Strategy Based Pricing Methods 55
Transfer Pricing
Transfer pricing is an internal pricing technique.
It refers to a price at which inputs of one department are
transferred to another, in order to maximize the overall
profits of the company.
5 Pricing based on other Economic 56
Considerations
Administered Pricing
Dual Pricing
Price discrimination or Differential Pricing
5 Pricing based on other Economic Considerations 57
Administered Pricing
The prices which are statutorily fixed by the government,
considering the cost and the stipulated profit per unit.
The purpose of introducing administered price is to control prices of
essential goods and inputs as well as to provide them at
economic prices to weaker sections of consumers and producers
Fair price shops sell essential goods to public, is based on
administered prices.
Ex-Prices of certain goods like steel, fertilizer, coal, etc.,
5 Pricing based on other Economic Considerations 58
Dual Pricing
A market where commodity is covered by simultaneously
under the administered price as well as market price, is
said to have dual prices.
Ex. Sugar
5 Pricing based on other Economic Considerations 59
Price discrimination or Differential Pricing
Practice of charging different prices to customers for the same
good. It is also called differential pricing.
Price differentiation depends on geographical location of the
consumers, type of consumer, purchasing quantity, season, time of
the service etc.
Ex. Govt. Hospitals-Patients are charged based on their
income levels
Telephone charges, Movie tickets, Bus tickets, Train tickets
Other Pricing Strategies 60
Price Matching: A firm promises to match a lower price offered by any
competitor, while announcing its own price. It is necessary that one
should be confident, before adopting this strategy.
Promoting Brand Loyalty: This is an advertising strategy where
the customers are frequently reminded by the brand value of a given
product or service. Conviction is to retain the brand loyalty, so that
customers will not slip away when the competitors come up with lower
prices.
• Ex-Pepsi and Coke spend huge amounts on advertising campaigns to
draw the attention of consumers.
Other Pricing Strategies 61
• Time-to-time Pricing: This is also called randomized pricing strategy
where the firm varies its price from time-to-time, say hour-to hour or day-
to-day. Customers cannot learn from experience which firm charges the
lowest price in the market.
• For ex: Markets of bullion, currency and bank deposits.
Limit Pricing: A firm try to establish a price that reduces or eliminates the
threat of new entry of the firms into the industry.
Other Pricing Strategies 62
Psychological Pricing: Used to play on consumer perceptions
Psychological pricing is the business practices of setting prices lower
than a whole number. The idea behind psychological pricing is that
customers will read the slightly lowered price and treat it lower than
the price actually is.
Classic example – Bata ₹999,₹499 etc.,
Links with value pricing – high value goods priced according to what
consumers THINK should be the price
Other Pricing Strategies 63
Destroyer Pricing:• Deliberate price cutting or offer of
‘free gifts/products’ to force rivals (normally smaller and
weaker) out of business or prevent new entrants.
Anti-competitive and illegal if it can be proved
Other Pricing Strategies 64
One Price Policy
in which all customers are
charged the same price for all the
goods and services offered for
sale.
Ex-One Price Policy is anything
you buy at a store that is non-
negotiable or can only be bought
at one price, like a 2 liter bottle
of Sprite.
